Collapse in M&A Amid Debt Turbulence

Helen Thomas in New York and Anousha Sakoui in London

Wednesday, 21 Dec 2011 | 7:20 PM ETFinancial Times

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Mergers and acquisitions activity collapsed in the fourth quarter as the sovereign debt crisis and market volatility put the brakes on dealmaking and equity sales, pushing European investment banking fees to their lowest level in more than a decade.

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Fourth-quarter M&A volumes fell 32 percent to $375.3 billion from the previous three months, led by a 41 per cent decline in Europe. The drop, combined with a pullback in equity issuance amid turbulent markets, contributed to an 8 per cent fall in investment banking fees to $72.6bn for 2011, against 2010.

In Europe, fees totalled only $2.57 billion across all products, the worst quarter since records began at data-provider Thomson Reuters in 2000.

With European markets frozen while uncertainty surrounding the future of the eurozone persists, global M&A activity was up just 3.3 percent on 2010.

“The outlook for 2012 is binary. Either we will stabilise the European sphere and move forwards or we will hit crisis and have another decline,” said Paul Parker, head of global M&A at Barclays Capital. “At the moment, the further you get away from Europe the better you feel, but the markets are still meaningfully intertwined.”

Equity issuance slumped 27 percent in 2011. In the debt markets, investment-grade companies were able to continue funding themselves at favourable rates, but investor appetite for junk bonds see-sawed throughout the year.

“Volumes in equity and debt capital markets and M&A in 2012 are likely to be challenged, but with a crisis comes opportunity,” said Manuel Falco, co-head of European investment banking at Citigroup.

“There will be huge opportunities in the public sector to acquire state-owned assets, and companies will need to issue equity [for] defensive [purposes]. The crisis presents the best buying opportunity for acquiring a company in Europe.”

Even after the demise of the year’s largest announcement — AT&T’s $39 billion purchase of T-Mobile USA — U.S. activity remains up 12 per cent compared with last year, accounting for almost 40 percent of global activity, according to Mergermarket.

European activity is flat on last year, while in Asia, excluding Japan, volumes are down 11 percent. Emerging markets dealmaking fell about 10 percent after a bumper 2010.

But Simon Warshaw, joint global head of investment banking at UBS said that M&A between the developed and emerging world was just beginning: “We have, and will continue to see, growing Asian interest across sectors, especially in commodities and intellectual property. Generally, however, in M&A this year was not the time for companies to ‘bet the shop’.”

Energy, utilities and mining was by far the busiest sector across all regions. “The finite nature of natural resources compared to the long-term growth expectation globally means that there will be a permanent and increasing demand for these scarce assets,” Mr Parker said. “In a downturn, there is wide recognition that it is a good time to acquire these assets before they can rebound again.”